The current ETH beacon chain's pledge rate is 13.28%, and the average pledge rate of the top five PoS chains in terms of pledge market value is 60%-70%. Assuming that ETH's pledge rate can reach the pledge rate of other PoS chains, there is still nearly 5 times of room for growth. The current ETH beacon chain's pledged assets are about 22 billion US dollars. Without considering the ETH price, LSD will grow into a track with a business volume of hundreds of billions.

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In March 2015, during a fierce bear market, Bitcoin had fallen from a high of $1,100 for a year and was gradually bottoming out in the $200 range. At that time, the northern hemisphere was still chilly in spring, and the Ethereum mainnet had not yet been launched. After nearly a year of discussion and development, the early Ethereum team divided the development of Ethereum into four major stages, codenamed Frontier, Homestead, Metropolis, and Serenity.

Since then, an Ethereum march that depicts the gold rush of the American West opening up new territories, building homes, and developing cities has begun to play. Who would have thought that it was this plan that would foresight lead the development of Ethereum in the next eight years. Now, with the Shanghai upgrade approaching, the last step of Serenity will come to an end in March 2023, returning to peace.

Under the macro cycle of global monetary tightening, the venture capital market is shrouded in the shadow of a bear market, and the LSD (Liquid Staking Derivatives) sector has taken the lead in recent changes. The overall track has increased by an average of more than 40% in the past seven days. The leading project in the track, Lido, has increased by more than 60% in 7 days, and the high point has even doubled, adding a touch of green to the sluggish crypto market.

1. Current status of staking in the ETH2.0 market

The LSD protocol is a DeFi derivative track that has grown up with the upgrade of ETH2.0. It has not officially entered the mainstream DeFi vision before. As Lido's TVL surpassed MakerDAO to top the DeFi list, the asset scale of products such as RocketPool and Stakewise has also continued to expand. It seems that LSD has become a booming track and is in its infancy.

Since the launch of ETH beacon chain staking on December 1, 2020, more than 16 million ETH have been staked, with locked assets exceeding US$22 billion and nearly 500,000 verification nodes. It has become the PoS public chain with the largest locked assets and the most verification nodes. However, compared with the staking rates of the top five PoS chains by market value, ETH's 13.28% is still very early.

Except for ETH, the top five PoS public chains by market value have a pledge rate of more than 60%-70%. The level of the pledge rate affects the stability and security of the public chain. Ethereum will never lack narratives in this regard. I believe that after the Shanghai upgrade, with the release of ETH tokens, the drive for arbitrage and the development of the LSD protocol, ETH's pledge rate will continue to rise.

Assuming that the ETH pledge rate can reach 60%-70%, there is still nearly 5 times of room for growth. The current scale of pledged assets of the ETH beacon chain is about 22 billion US dollars. Without considering the price of ETH, LSD will grow into a track with a business volume of hundreds of billions.

2. Working Principle of LSD Protocol

Independent node validators need at least 32 ETH, which cannot be retrieved before the Shanghai upgrade. ETH validators are responsible for adding new blocks to the blockchain, processing transactions and storing data. There are certain risks in the process. Technical problems can easily lead to loss of pledged assets or rewards. The high threshold keeps a large number of ordinary users out.

The LSD protocol allows ordinary users to participate in staking and receive rewards without having to maintain the staking infrastructure. In addition, the design of the bill assets also releases the liquidity of ETH during the staking period, so it has captured a large number of users and assets in a short period of time and developed into an independent track.

LSD’s business logic includes three roles: ETH Stakers, Pools, and Node Operators.

Stakers are responsible for providing ETH, Pools are responsible for collecting, managing and distributing revenue, and Nodes are responsible for signing, verifying and producing blocks on the beacon chain.

Ordinary users deposit ETH into the Staking Pool, and the LSD protocol hands the ETH collected in the pool to the node operator, who then performs signature verification to obtain rewards. In this link, the operator needs the validator's private key to complete the verification work, but if the validator's private key is directly handed over to the node, there is a high risk of various malicious activities, so SSV Network and Obol Network, which are DVT shared validators that fragment the validator's private key, have gradually developed.

3. Development of LSD Track

Currently, in the ETH2.0 staking market, 16,006,711 ETH have been staked in the beacon chain (data as of January 12, 2023). The LSD protocol accounts for 32.8% of the ETH, the CEXs account for 28.7% of the ETH, the Whales account for 23.5% of the ETH, the Staking Pools DeFi protocol accounts for 10.1%, and other individual staking nodes account for 4.9%. CEX has a natural advantage in that it can be staked in a centralized exchange with one click, but the LSD protocol can surpass CEX and take the first place, which shows its future development potential.

In the LSD protocol sector, there are currently 9 projects that can be counted, including Lido, Rocket Pool, Stkr (Ankr), Stakewise, StakeHound, Cream, SharedStake, Staked Finance and Frax Finance. Lido alone has won 4.65W ETH tokens, accounting for 88.41% of the LSD sector market share and 29% of the entire beacon chain staking market share, surpassing the total number of ETH staked by all CEXs.

A comprehensive comparison of the yields of various LSD protocols, StakingPool and CEX, based on the yield backtest data of the past 30 days, shows that there is not much difference in the performance of each platform in this regard, and the average level is between 5%-5.5%, so APR is not an important factor causing business gaps.

Recently, Frax Finance launched the liquidity staking business. Frax purchased part of the protocol revenue into FXS tokens and then distributed them to the staking users, which is equivalent to an APR of 7.69%. The high yield quickly attracted a large number of users to participate in staking. Currently, the staked ETH has exceeded 50,000, ranking fifth in the LSD section.

4. Ecological opportunities in the LSD track

As mentioned earlier, node operators need the validator's private key to complete verification work. However, if the validator's private key is handed directly to the node, there is a high risk of various malicious activities. Therefore, distributed validator technology DVT (Distributed-Validator-Technology) came into being.

1. DVT section

DVT splits the validator's key into multiple fragments and distributes them to multiple different nodes. The verification work is completed by multiple node operators, and a single node operator has no right to complete signature verification independently. In this way, it not only reduces the risk of node maliciousness, but also solves the problem of single point failure, and the robustness of the system is also improved. Currently, there are two main solutions on the market: Obol and SSV.

  • SSV Network

SSV (ssv.network) uses Secret Shared Validator technology for encryption, splitting the validator key into 4 KeyShares between non-trusted nodes. If one of them goes down or fails, the other three can operate the node, solving the centralization problem of the validator key, and the Ethereum network has become more decentralized.

  • Obol Network

Obol (obol.tech) is a trust-minimized staking ecosystem that focuses on scaling consensus by providing permissionless access to distributed validators, enabling users to create, test, run, and coordinate distributed validators. It creates distributed validation clusters that allow different validation nodes to come together as a single whole to stake. Single stakers who join the cluster do not have to worry about a single point of offlineness, which makes the normal operation of the validator more competitive and minimizes the risk of centralized maliciousness.

2. Re-Staking Section

EigenLayer is a Re-Staking protocol built on Ethereum. Users do not need to stake directly on Ethereum, but in Eigenlayer's smart contract, and then they can stake twice to other protocols such as side chains, cross-chain bridges, and oracles. This will make the application more secure, because many different entities in the ETH ecosystem have their own trust networks, and the collapse of some of these trust layers may lead to vulnerability exploits and hacker attacks, and it will cost more to attack the network security shared through Eigenlayer.

In addition, when users provide Re-Staking, they can also obtain staking income from application layer projects, which improves network security while also improving the efficiency of fund use. EigenLayer will support Re-Staking of three assets: ETH, ETH's LP tokens, and stETH's LP tokens.

By leveraging the existing trust network to protect other infrastructure and middleware layers through secondary staking, this narrative has broad prospects and is expected to become the consensus security hub of the LSD track.

V. Conclusion

LSD will grow into a track with a scale of hundreds of billions, but this is only in terms of the size of its business assets. The trading opportunities in the secondary market still need to be comprehensively analyzed in combination with the market value and application scenarios of the Token. In addition, while the liquidity staking track is exploding, in the LSD-related derivative ecosystem, the DVT and Re-Staking sections that serve the LSD protocol-related components will also have Alpha opportunities.

references:

https://dune.com/hildobby/ETH2-Deposits

https://ethereum.org/en/staking/pools

https://twitter.com/Maia_Zhao/status/1595983351671795713?s=20&t=ktcTIA6_eVAjbFO5psbvXA

https://docs.ssv.network/

https://docs.obol.tech/

https://www.eigenlayer.com/research

https://www.panewslab.com/zh/articledetails/lj7plnf0.html